Norfolk Southern achieved higher levels of performance throughout the organization in 2003.

Refinements to the operating plan and new performance measurement tools helped the company produce more consistent and reliable transportation service and provide higher value to customers.

Asset and work force productivity were enhanced through the development of more cost-effective ways of doing business.

The collective efforts of many initiatives paid off in revenue growth and better returns for shareholders. NS strengthened its network for supporting new business growth anticipated as a result of improved service and a more robust economy.

NS received its 14th consecutive E.H. Harriman Gold Medal Award, continuing its leadership in employee safety among the nation’s largest railroads.

The company continued its support of employee reservists called up for active duty in the armed forces. Beginning with the activation of reservists for Operation Enduring Freedom in 2001, NS has offered enhanced benefits designed to help employees and their families during the deployments. The leave benefits include a monthly income supplement and continued health care and life insurance coverage.

NS posted revenues $198 million higher than in 2002.

Net income increased by $75 million or 16 percent.

Earnings per share increased by 16 percent.

For the second consecutive year, NS increased the quarterly dividend on its common stock, from 7 cents to 8 cents in July.

Cash provided by operating activities increased by $251 million more than in 2002.

NS has reduced long-term debt by $693 million since the beginning of 2001. NS’ share of Conrail’s long-term debt has declined $103 million. The total three-year reduction in debt obligations is $796 million.

NS credit ratings are among the best in the industry, reflecting the company’s emphasis on solid financial performance.

NS’ fuel hedging program in 2003 lowered the company’s average price per gallon of fuel. Favorable hedge settlements reduced expenses by $59 million for the year. Hedging helps to reduce the volatility in the price of diesel fuel and protects the company and investors from the impact of erratic price swings in the fuel market. At year-end 2003, NS had 63 percent of projected 2004 fuel consumption hedged at an average price of 78 cents per gallon.

As part of an effort to address costs, the company initiated a voluntary separation program for nonunion employees. In total, 553 employees were approved for separation, of which 314 also were eligible to retire under the company’s retirement plan. NS recorded a $66 million after-tax charge against fourth-quarter earnings related to the program.

New and enhanced tools added to the company’s abilities to measure service performance and to make quick adjustments to network operations when necessary. Field personnel were equipped with improved real-time information, helping them to make informed decisions about service and to master performance of their own operations.

The company’s Thoroughbred Operating Plan, the foundation for NS’ transportation network, drove greater consistency for merchandise traffic movements. NS’ Coal Transportation Management System — a commodity transportation management system that now includes grain traffic information — and the Strategic Intermodal Management System also provided support for improved network operations.

Further driving productivity and efficiency, NS continued use of remote control locomotive technology in switching operations.

Rail freight transportation essentially comprises three operations: customer pickup and delivery, running the trains, and making the right connections at intermediate yards between origin and destination. NS rolled out new systems in the second quarter of 2003 that enhance the measurement and management of these components in detail. The systems pinpoint performance on a car-level basis, helping to improve consistency and reliability of service for customers.

Customer pickup and delivery is a function of moving a rail car between a customer’s facility and a local yard at origin and destination. NS created a system called Local Operating Plan Adherence to help manage this transportation segment. The system measures the amount of local switching work actually performed against the work scheduled in a 24-hour period. Field personnel can drill down to identify service issues by region, division, terminal, serving yard, customer or industry route. NS’ local switching performance improved from 65 percent in the second quarter, when the system was introduced, to 74 percent in the fourth quarter.

Running the trains from origin to destination is measured best by on-time performance. Running trains according to the operating schedule results in dependable, consistent customer service. NS is implementing a set of tools in its Operating Plan Adherence system to help manage compliance with the Thoroughbred Operating Plan for individual shipments moving over the road from origination to destination yards. The tools measure actual versus scheduled times of arrival and permit better analysis of system operations. Overall on-time train performance improved to 84.3 percent in 2003.

Making the right connections is essential for efficient, on-time transportation operations. The Operating Plan Adherence tools provide for measurements of train blocking and terminal connections. The measurement data are supported by NS’ Thoroughbred Yard Enterprise System, newly enhanced as a real-time railroad management tool. TYES now highlights cars that must make a connection on the next train, cars in jeopardy of missing connections, and cars running late. Blocking plans and car trip plans are compared to actual results to ensure that the right cars are in the right blocks on the right trains. Operating Plan Adherence began at 11 rail yards in the second quarter and was integrated at more than 70 yards in the fourth quarter. In that time, total connection performance held steady around 75 percent, with major emphasis for improvement focused in 2004.

In addition to the benefits in operational efficiency and customer service, these new and enhanced systems and other efforts in 2003 also led to improvements in asset utilization.

Locomotive fuel consumption was reduced by three-fourths of a gallon per carload, saving more than 5 million gallons.

Better asset utilization led to a reduction of more than 5,000 freight cars from the fleet.

Freight car utilization improved 2 percent.

Locomotive use efficiency increased 2 percent.

Gains in operating efficiency mean better service. NS achieved a record number of consecutive days without a service failure for customer United Parcel Service, including a perfect fall peak season. The error-free service streak exceeded 100 days, continuing into 2004.

Here are some customer service awards NS received during 2003.

Coors Brewing Company named NS Transportation Supplier of the Year.

Toyota presented NS two Logistics Excellence Awards for on-time performance and quality performance.

Schneider National presented its Partners in Quality Award to NS for achievements in service, innovation, continuous improvement and ease of doing business.

Eaglebrook Inc. named NS Carrier of the Year.

Hershey Corp. presented its Galaxy Award to local NS crews serving Hershey facilities.

The American Chemistry Council recognized NS with its National Achievement Award for outstanding support of TRANSCAER, a chemical safety awareness program.

Logistics Management magazine cited Triple Crown Services Company, an NS affiliate, as Best Intermodal Service Provider for the third consecutive year.

The payoff for improvements in operating performance and service is better business results. Overall for 2003, revenue increased $198 million on 2 percent more carloads than in 2002. Service improvements and marketing efforts led to significant conversion of both intermodal and merchandise traffic from the highways to the rails. Value-based pricing contributed to a 1 percent increase in average revenue per unit.

NS’ industrial development activity resulted in the location of 69 new industries and expansion of another 20 in 2003. This represents investment of $1.5 billion by NS customers and creates an estimated 7,200 jobs in 17 states. NS expects this activity eventually to generate more than 85,000 carloads annually.

Intermodal traffic grew 5 percent to a record volume. Revenue increased by 5 percent over 2002.

The truckload segment led the growth with a 14 percent increase, more than half of which was highway-to-rail conversions.

NS opened its first local guaranteed service lane between Chicago and the Northeast.

Interline guaranteed service lanes were increased from nine to 15.

International traffic grew by 9 percent.

Overall, merchandise revenues increased by 2 percent in 2003, and carloads increased by 1 percent. Revenue per car increased by 1 percent.

Agriculture, Consumer Products and Government posted an 8 percent revenue growth on a 7 percent increase in carloads. Revenue and carloads both were record highs. Corn shipments set a volume record, resulting in an 8 percent revenue increase. Reopening of a PCS facility at Occidental, Fla., brought back phosphate shipments, generating an increase of 11 percent in fertilizer revenue. Shipments of military equipment increased by 36 percent.

Paper, Clay and Forest Products revenue was up by 5 percent, and carloads increased by 1 percent. Pulpboard, woodchips and printing paper markets benefited from improved paper market conditions and motor carrier conversions. Partnerships with other carriers enabled NS to extend storage, rail and truck delivery services for paper, lumber and other wood products.

Automotive revenue and carloads decreased by 3 percent due principally to reduced vehicle production and numerous model changeovers at NS-served plants. During 2003, NS began direct rail service to a new Honda plant at Lincoln, Ala. NS teamed with Union Pacific to create the de Mex AutoFlyer, which reduced transit schedules by two days for auto parts shipments from the Midwest to Mexico.

Chemicals revenue increased by 2 percent on 1 percent more carloads. Motor carrier diversions, higher plastics shipments and increased industrial chemical volume contributed to 2003 results. Plastics carloads increased by 2 percent for the year.

Metals and Construction revenue was up 1 percent on 1 percent fewer carloads. Sheet steel revenue was up by 3 percent, scrap metal revenue increased by 11 percent, and cement revenue was up by 6 percent. A new Steelnet distribution facility expanded market reach. Highway conversions helped offset lower volumes in import slab steel.

Overall, coal revenue increased by 4 percent in 2003 on slightly more carloads.

A new Coal Transportation Management System improved trip and car planning. The system allows NS to move loads and empties quicker, generating faster load-to-load cycles, which improves customer service and reduces investment in hopper cars.

Export coal through NS’ Lamberts Point transload facility at Norfolk was up by about 2 million tons. Increased demand from Europe developed during the year and continued in first-quarter 2004.

Utility shipments increased in the North and decreased in the South, where reduced electricity generation was a result of mild weather and installation of clean coal technology devices.

Industrial coal traffic was flat with 2002 levels, while the domestic metallurgical coal market was down due to a decline in integrated steel production.